KongZhong Corporation (KONG)

Q1 2010 Earnings Call Transcript

May 19, 2010 7:30 pm ET

Executives

Jay Chang – CFO

Wang Leilei – Chairman & CEO

Analysts

Andrey Glukhov – Brean Murray

Adam Krejcik – ROTH Capital Partners

Ming Zhao – SIG

Jenny Wu – Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 KongZhong Corporation earnings conference call. My name is Eva, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions)

I would now like to turn the call over to your host for today, Mr. Jay Chang. Please proceed, sir.

Jay Chang

Thank you, operator. This conference call may contain forward-looking statements. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. For additional discussion of risks and uncertainties relating to forward-looking statements and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call.

Thank you for your interest in KongZhong. On the call today, we have our Chairman and CEO, Mr. Wang Leilei; and myself, Jay Chang, the company’s CFO. I will go over our 1Q results before handing over the call to our CEO, Mr. Wang Leilei.

Total revenues for the first quarter of 2010 were $40.6 million, an 18% sequential increase and a 37% increase from the same period last year. As we continue to transition our business to become a cross-platform digital entertainment company, mobile game revenues made up 23% of total revenues, while Internet online games contributed about 10%. WVAS revenues contributed less than 65% of total revenues compared to 80% in the same period last year.

Total gross profit was $17.7 million compared to $15.7 million in 4Q, while gross margin declined slightly to 44% compared to 46% in the fourth quarter. Total OpEx was $14 million in 1Q, a 17% sequential increase due to additional product development, headcount in our online game division, and the addition of $1.1 million in intangible amortization associated with the acquisition of Dacheng.

Total operating profit in 1Q was $3.7 million compared to $3.6 million in 4Q, while operating margins were 9% compared to 10.6% in the fourth quarter. First quarter net profit was $3.2 million compared to $2 million in 4Q, with net margins of 7.8%. Non-GAAP net profit, which excludes stock-based compensation charges and amortization of intangibles associated with the acquisition of Dacheng was $6.1 million compared to $5.4 million in the fourth quarter.

Based on 35.6 million basic and 38.8 million fully diluted ADS, net profit was $0.09 per basic ADS, $0.08 per diluted ADS, and $0.15 per non-GAAP net profit per diluted ADS. At the end of 1Q, our cash and cash equivalents were $130 million, roughly equal to $3.7 million or $3.7 per basic ADS, and this figure already takes into account the cash portion of the first payment to Dacheng shareholders of $9.6 million.

Now, I would like to turn to each business unit’s financial performance, namely Mobile Games, Wireless Internet Services, WVAS and through the acquisition of Dacheng Net Games. Total mobile game revenues in the first quarter were $9.5 million, a 92% increase from the same period last year and a 29% quarter-over-quarter increase. Mobile game gross profit for 1Q was $3.6 million compared to $3.7 million in the previous quarter, a slight decrease due to the higher revenue share to China Mobile for additional distribution fees for the mobile game monthly subscription package platform, a 29% increase from the same period last year.

Mobile game gross margin was 38% compared to 50% in 4Q. As previously discussed from the past quarter, the decline in mobile game gross margins is due to the company’s proactive shift to a new mobile gaming platform, namely China Mobile monthly mobile game subscription package in order to offset the impact of the transaction-based portion of the G Plus mobile game billing platform which was suspended at the beginning of December. However, while this new mobile game platform is expected to be a more stable source of recurring revenue, it relies more on our mobile operator partner's resources and therefore has a higher revenue share component to our mobile operator partners compared to the transaction-based portion of the G Plus game platform.

As mentioned before, we are still working with China Mobile's mobile game center in Jiangsu province to transition a portion of our mobile game monthly subscribers to a new billing platform, which will allow us to promote and acquire game subscribers on our own channels and bypass the traditional distribution fees. As a result, we expect gross margin for our mobile game business to increase gradually in the coming quarters, with a target of 45% to 50% gross margin over the medium term.

Revenues from downloadable mobile games were $8.95 million, representing a 112% increase from the same period last year and a 37% increase from 4Q. As mentioned before, the strong performance in the downloadable mobile game revenue was due to the company's proactive focus on developing monthly mobile game subscription packages with China Mobile.

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